AP Photo. Some think Warren Buffett should pay a
cash dividend to Berkshire Hathaway shareholders.
Should Warren Buffett authorize a regular dividend payment for Berkshire Hathaway shareholders?
That was the subject of an interesting conversation I had this weekend with a close acquaintance of mine whose investing acumen I very much respect.
My acquaintance is looking to build a conservative portfolio of bonds and ultra-safe stocks that will allow him to sleep well at night. He cares more about capital preservation than capital gains, and he wants his stocks to generate some income with which he can enjoy his life.
Berkshire meets most of his investment criteria. It's a diversified fortress of a company with a sterling balance sheet and more than $20 billion in cash at last check. Its CEO has said his most important rule in investing is "don't lose money." But my acquaintance does not plan to buy Berkshire for the simple fact that it generates no income via dividends.
Buffett has not authorized a cash dividend to Berkshire shareholders since 1967. Rather he has elected to retain the earnings and reinvest them. He's said that he'll only pay a dividend if he can't find a more productive use for the money at Berkshire.
It's tough to argue with Buffett's results over the past four decades. But my acquaintance is quick to point out that the past five years have not been as impressive for Berkshire (or most companies, for that matter), and he thinks part of investors' reluctance to buy Berkshire is the lack of dividend. He thinks if Buffett were to authorize a dividend in line with the Standard & Poor's 500 rate it would put a floor under Berkshire's stock price. He points out that it's getting harder for Buffett to find the types of huge investments that can move the needle at Berkshire, so why not pay out some of the earnings to investors?
I recently calculated that the dividend yield on Berkshire's common stock portfolio was about 2.5 percent, roughly the same as the S&P 500 yield. So let's say Buffett decided to match that and pay Berkshire shareholders a 2.5 percent annual payout. By my calculations that would cost Berkshire about $3.5 billion a year (based on about 1.06 million outstanding A shares and 14.84 million outstanding B shares, and a 2.5 percent payout per share from Friday's closing prices of $90,500 and $2,950).
First-quarter operating earnings were $1.7 billion (in a recessionary environment), so at that pace Berkshire would take in $6.8 billion in operating earnings this year. That's about double the amount Berkshire would pay in dividends at a 2.5 percent yield. Berkshire also has a huge cash hoard from which it could draw dividend payments.
One potentially awkward thing about Buffett declaring a dividend would be that he himself owns about 26 percent of the company. So using the above calculations, Buffett would get about $910 million of the $3.5 billion.
Anyway, I'd like to see what you think, so please take this poll and if you want to expand beyond the simple yes/no answer add your comments in that field.
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